Forecasts, Nowcasts and Pastcasts all have their right place in investing. The risk arises when the latter two start to disguise themselves as the first.
One reason why combining quant and fundamental investing is so hard is because quantitative analysis focuses on finding repeatable patterns while fundamental analysis focuses on identifying unique changes.
Things like imagination, creativity, and innovation - are experienced by the divergent mind. Yet as quants, we rarely spend time on divergent activity.
Over the long-run, since 1877, Risk Parity’s performance looks very similar to a 60/40. However, the eye can easily miss the ‘wild swings of dispersion’ along the way.
The rise and fall (?) of Risk Parity is a great case study of the frameworks I have been writing about so far. We start with the concept of “Chasing Diversifiers.”
Nothing sounds simpler than earning the return of a simple 60/40 strategy, right? Just buy two ETFs at Vanguard, Global Stock and Global Bonds, for a combined 14 basis points fee, re-balance quarterly and you are done, right? The reality for most investors could not be further from this.
